Urges Relaxing Rules For Oversight
Report Seeks Shift to 'Principles' To Ease a Financial
Burden; Protection for Auditors, Directors
By Greg Ip, Kara Scannell and Deborah Solomon
The Wall Street Journal
Thursday, November 30, 2006
A blue-ribbon committee on financial regulation has called
for better protection of auditors, company employees and
outside directors from authorities and lawsuits, as well as
less-detailed rule-making and lower-key investigations.
The Committee on Capital Markets Regulation's report, to be
released publicly today, is one of the most high-profile
efforts to date to address concerns that excessive
regulation -- much of it a response to recent corporate
scandals -- is adding to corporate costs, stifling the
public securities markets and causing the U.S. markets to
lose business to foreign competitors.
"The United States is losing its leading competitive
position," the 148-page report says. One reason is "the
growth of U.S. regulatory compliance costs and liability
The committee is directed by Harvard law professor Hal Scott
and co-chaired by former White House adviser Glenn Hubbard,
now dean of Columbia University's business school, and John
Thornton, former president at Goldman Sachs Group Inc. and
now chairman of the Brookings Institution. The group's
recommendations for the most part either parallel efforts
already under way or would require a different
implementation of existing laws, primarily by the Securities
and Exchange Commission. Only a few would require new
Treasury Secretary Henry Paulson is likely to welcome the
report; the former chief executive of Goldman Sachs already
is advocating many of its recommendations and recently
called for a broad re-examination of regulations and laws.
He will hear more opinions before long. Early next year, the
U.S. Chamber of Commerce is expected to release its own
report, and Sen. Charles Schumer, (D., N.Y.), along with New
York City Mayor Michael Bloomberg, have hired McKinsey & Co.
to assess market competitiveness and its impact on the
city's economy. Early next year, Treasury will host a
conference to discuss the regulatory, legal and accounting
The group would like the President's Working Group, a
coordinating group headed by Mr. Paulson and including the
heads of the SEC, Federal Reserve and Commodity Futures
Trading Commission, to use its report to recommend specific
reforms. That would give the issue "national economic
significance," said Mr. Scott.
But Mr. Paulson will also have to decide which ideas are
politically viable and which are dead-on-arrival. "Obviously
anything you need congressional approval for would be
difficult," said Mr. Scott, such as auditor-liability caps
and reduced state-federal enforcement overlap.
Mr. Hubbard said, "I'm not sure this is as horrible a
political [environment] as people think. There are
Democratic leaders who have been quite bold in this area,"
citing, for example, incoming Senate Banking Committee
Chairman Christopher Dodd's (D., Conn.) role in limiting
shareholder class-action lawsuits in the 1990s.
The report makes 32 recommendations, of which six relate to
easing the application of Section 404 of the 2002
Sarbanes-Oxley Act governing internal company-financial
controls. The SEC already plans to present new guidance on
section 404 on Dec. 13. Companies have complained that the
section is expensive and onerous to implement.
Other recommendations call for setting a higher bar for
regulators or private litigants to go after outside
auditors, independent directors and company employees,
especially when they act in good faith. It also recommends
Congress cap auditors' liabilities, as some European
It recommends lawyers who donate to the officials who run
public pension funds be barred from representing those funds
in a class-action securities lawsuit. This could be done by
the Department of Labor passing a rule under pension laws,
or separate legislation.
The report's overarching theme is a change in regulatory
philosophy. The revised philosophy is one based more on
general principles than prescriptive rules, more aware of
costs as well as benefits of new rules and less intrusive.
It lauds Britain's Financial Services Authority, which uses
"principles"-based regulation and oversees all British
financial firms, in comparison with the U.S.'s multiple
federal and state banking and securities regulators.
It suggests the SEC act more like federal banking
regulators, such as the Federal Reserve, which concentrate
on the soundness of the financial system and less on
individual acts of wrongdoing, "with less publicity
surrounding enforcement actions." That would encourage
securities firms to step forward when they find problems, it
The report also says the U.S. has fallen behind some other
countries in protecting shareholders' rights. It recommends
that companies be required to submit "poison pills," meant
to deter hostile takeovers, to shareholder approval.
It also says companies should require directors to be
elected by a majority of voting shareholders.
On the contentious issue of executive compensation, it
advises no action.
The SEC, it says, should create a special staff group to
measure costs and benefits of rules before they are
Greg Ip at
email@example.com, Kara Scannell at
firstname.lastname@example.org and Deborah Solomon at